VideoIf he had greater advance notice, Adams probably would have boned up on Dutch employment laws. The CEO notes that he granted one new hire in Amsterdam a lifetime contract (which is what the employee had at his previous job) without understanding the contract's binding nature. "There's essentially no concept of at-will employment," explains Adams, who is now more familiar with work rules in the Netherlands. "I didn't fully grasp that. It has the potential to be a substantial liability for the company."
That's a misstep Adams won't make again. Likewise, Hoffman says the unpleasantness in Japan helped him when he began mapping out the company's China strategy. Rather than rush things, the company recruited a skilled communications executive from China's petroleum industry and brought her back to the company's Silicon Valley office for 18 months to learn the company's business. Then and only then did the agency send her back to open an office in Beijing. "A year and a half seemed like an eternity," Hoffman concedes. But he says the "disaster" in Tokyo taught him a valuable lesson. "I learned that if something looks like a shortcut, it probably isn't."
Patience has paid off. The Hoffman Agency's unit in Beijing has grown to 14 people and is now the company's fastest-growing operation.
Don Durfee is research editor at CFO.
Software Without Borders
Small businesses may be venturing abroad in large numbers, but you'd never know it by the lack of software titles available for managers at those companies. Sage Accpac ERP, for example, is a fully featured, Web-based resource-planning program, but the software is targeted at international companies with at least 100 employees. That leaves a lot of undersized companies out in the cold.
Leon Hunt ran into this problem in 2002 when he was setting up an infrastructure for The Hoffman Agency's overseas operations. Hunt, CFO at the Silicon Valley–based public relations firm, says he couldn't find any accounting or time-and-billing software packages that fit his requirements. ERP packages from the likes of SAP and Oracle were too expensive, and scaled-down packages didn't include essential features such as currency conversion. Ultimately, Hunt kept his Peachtree accounting system (from Sage Software). "We just had to do the translations manually," he laments.
Even today, the Peachtree program, which is aimed at companies with 5 to 50 employees, lacks features for conducting cross-border business, such as multiple-language capability. Paul Hamerman, vice president, enterprise applications, with Forrester Research, says good finance programs do exist for slightly bigger companies, including packages from Microsoft Dynamics NAV, Exact Software, and the Sage Accpac application. Those products offer a full range of international business functions and, surprisingly, don't cost a fortune. Hamerman estimates that the software will run a small company between $10,000 and $25,000. A caveat: the programs are mostly one-off solutions that are difficult to deploy over a wide-area or location-by-location network. Says Hamerman: "You have to transfer the data into a consolidation package, or, God forbid, Excel." — D.D.
The Tax Trap
Finance managers who think global tax planning means mastering foreign tax codes may be peering through the wrong end of the telescope. Tax experts say the biggest tax traps for U.S. businesses with international operations often lie in their own backyards. That's because the United States, unlike many countries, taxes its citizens on the money they make around the world, not just at home. Here are a few of the snares, courtesy of Uncle Sam:
Those Darned Forms. International business brings a ton of paperwork, both from the Internal Revenue Service and the states. Examples: IRS form 5471 (ownership of a foreign corporation) and U.S. Treasury form TD90.22-1 (overseas bank accounts worth more than $10,000). Failure to file these forms — or just plain getting them wrong — can trigger fines ranging from $10,000 to $100,000 and possible criminal penalties. BDO Seidman tax partner Shawn Carson says filing problems often arise when small businesses turn to local tax firms with little experience in international tax compliance.
Pay and Pay Again. When setting up the legal structure of an overseas business, companies often choose pass-through entities such as partnerships or S corporations. Done right, these setups provide a nifty shelter, with the parent company paying only U.S. tax on the foreign income. Get it wrong, though, and troubles abound. A U.S. partnership that creates a Canadian subsidiary, for instance, may well end up paying a dividend tax in the United States and a corporate tax in Canada — without the benefit of a foreign tax credit offset.
DIY Transfer Pricing. U.S. companies with multiple overseas operations often conduct sales between those businesses to help shift profits to lower tax regimes. Advisers exist to help companies set up the schemes, but the service can be expensive (full reports can cost as much as $40,000). Doing it yourself can be tricky, though. Tax experts say managers often set prices too high or too low. "I've seen some small companies do it on their own without a problem," says Carson. "But I've seen others that have run into all sorts of problems with the tax authorities." — D.D.
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